On June 27, 2023, the Official Committee of Unsecured Creditors (the “Committee”) in the BlockFi Chapter 11 bankruptcy reorganization case filed an Objection to the company’s Plan and essentially requested that the company be liquidated. The Official Committee is made up largely of 600,000 individual customers of BlockFi.
The Committee based its position on the contention that the “the ‘reorganization’ case is over.” As it states, the Debtors’ investment bankers ran an extensive M&A process, which did not generate a single actionable bid and the business had ceased all operations. “Here, unlike nearly all other Chapter 11 cases, there is no: DIP loan; secured debt; unsecured bond debt; utilities, vendor or supplier claims; PBGC, pension, or other employee-benefits obligations. Besides an incidental amount of trade debt, rejection damages, and employee bonus claims, there are customers. The Court has already given all the guidance necessary to allocate value among the creditors, so this case should be a snap to wrap up and at very little cost.”
Nevertheless, the Debtors were burning through about $16 million a month in administrative expenses. According to the Committee, this included salaries of more than 100 individuals, “many of whom . . . have had little to do but work on their golf game.” In seven months, the cost to the creditors was about $94 million.
After asking rhetorically how this is happening, the Committee said that it is “extortion.” That is, the reason that the Debtors were refusing to cut expenses, and instead threatening to magnify and compound the waste, is because they wanted releases for the insiders. Their strategy was that, unless the Committee relents and agrees to the releases, the Debtors will continue to erode much of the remaining value that would otherwise be available for distribution to the customers.
But the Committee explained why it could not agree to the releases. It referred to an Investigative Report that it believed shows that BlockFi management bears legal culpability for loans (to the tune of $400 million) made to FTX affiliate, Alameda Research. The report was under seal, meaning that the customer base did not know any of the details, but, because the Committee acts as a fiduciary, it could not agree to the release and bury what it knew. The Committee wrote:
It is time to end all of this. It is time for the Debtors’ unsecured creditors to finally come to know what BlockFi truly was, who [co-founder and CEO] Zac Prince truly is, how much he personally profited from the company, and what he and certain of his colleagues were doing (in juxtaposition to what they promised customers) when no one was watching. It is time for the Court to order an end to the burn and, thereby, end the extortion tactics. . . It is impossible to see how customers – once they are made aware of what lies beneath the surface of this case – will support a plan that delivers insider releases . . . .
The Committee offered three alternatives for bringing the case to a swift, efficient and orderly conclusion: (i) ordering the appointment of a Chapter 11 trustee who can quickly bring about consensual case resolution; (ii) opening up exclusivity so that the bankruptcy can be wrapped up with a plan that does not include undue releases; or (iii) converting the Chapter 11 proceeding to a Chapter 7 case.